In the early months of President Obama’s first term, there was a great deal of talk about the need to invest in clean energy to reduce our reliance on oil imports and create jobs.
Indeed, billions were earmarked for various clean energy initiatives, though those funds mostly have dried up in subsequent years. And it’s not just government spending.
As we now know, domestic oil and gas production surged, blunting the move toward a reduction in fossil fuel consumption. That created headwinds for clean energy technologies such as solar and wind, though technology gains have helped these renewable sources of power stay relevant.
One part of the 2009 clean energy playbook — energy efficiency — has drifted away.
You can see the current lack of interest in energy efficiency spending by glancing at the income statement of Ameresco (NYSE: AMRC), which helps reduce the energy footprint of office buildings, college campuses and other facilities.
Ameresco’s sales soared from $400 million in 2008 to above $700 million by 2011, but have since been in decline.
The company’s sales appear stuck in the $550 million to $600 million range these days, and shares have fallen by more than half from their 2011 peak to below $7.
Yet behind the scenes, Ameresco appears to be emerging from its slump. And we know that by looking at a key measure: backlog. Simply put, Ameresco’s phones are ringing again.
Backlog rebounded 23% in the second quarter compared to the same year-ago quarter, which is a clear sign that the recent slump has ended. Yet the $400 million in backlog understates the fact that Ameresco has also scoped out additional deals that are valued at $995 million.
“The proposal activity is up considerably from where it was last year at this point in time,” said AMRC’s president and CEO George Sakellaris in a July 2014 call with analysts. These deals aren’t yet signed into contracts, and right now can only be considered to be “potential backlog.” But even modest conversion of negotiations into deals will enable backlog to keep on rising.
To understand what’s driving backlog, let’s take a closer look at this business model.
Ameresco works with a company’s chief financial officer to assess the current spending on energy in every building the company operates. Ameresco then provides a range of products and services to help boost efficiency, from better heating systems to more cost-effective lighting to small-scale renewable energy plants. By the time Ameresco has completed its work, most of the buildings receive a LEED (Leadership in Energy and Environmental Design) certification.
The key sales proposition: Such investments have rapid payback times and lead to ongoing cost savings once they are paid for. The moves make sense in a world of climate change concerns, but more importantly, they make good business sense.
Let’s pivot back to that billion-dollar unsigned backlog for a moment. Many of the company’s proposed deals will entail high upfront costs for clients before they see robust paybacks later on. As a result, management realizes that, just like in the solar industry, financial institutions may need to play a bigger role in major projects.
“We are talking with some outside investors (and) are working very hard to see if we can have an efficient financing mechanism for all of our offerings,” noted Sakellaris. This stands out as a huge catalyst. Any concrete news on this front will signal to investors that Ameresco’s $1 billion unsigned backlog can be approved much more quickly.
To be sure, Ameresco had expected to gain from legislative changes that provided incentives in energy efficiency. Yet Congress failed to ratify a bill this past spring despite the fact that it had seemed to have widespread bipartisan support. President Obama was able to subsequently announce an additional $2 billion in funds for energy efficiency as part of his Better Buildings Challenge.
After a long and steady slide, shares of AMRC got a solid boost from the tone of the company’s second-quarter conference call. Shares made a quick move from $6.50 to nearly $9, only to hit fresh headwinds as investors began to flee small caps in general. That sets up a fresh entry point for those that missed the first rally.
By the time Ameresco’s proposed financing mechanisms come into place, investors will again be thinking of this as a company with a “billion-dollar backlog.” Shares, which rose above $15 in 2011, could revisit such heights as backlog continues to rebound in coming quarters.
Over the next four to five months, when Ameresco reports third- and fourth-quarter results and issues 2015 guidance, a near-term move to $10 seems quite feasible. This move would represent an EV/sales multiple of just 1, while right now, the company’s enterprise value stands at $460 million, while sales approach $600 million. Investors who get in at current prices could see upside of more than 45%.
Recommended Trade Setups:
– Buy Ameresco (NYSE: AMRC) at the market price
– Set stop-loss at $6
– Set initial price target at $10 for a potential 46% gain in 4-5 months
– Set stop-loss at $6
– Set initial price target at $10 for a potential 46% gain in 4-5 months
David Sterman
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